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Potential Liability Concerns & Litigation on New Business Entities Discussion

Potential Liability Concerns & Litigation on New Business Entities Discussion

Potential Liability Concerns & Litigation on New Business Entities Discussion

Dental Light (DL), a publicly traded corporation incorporated in Delaware and headquartered in Austin, Texas, develops and manufactures a range of laser-based products used in dental care. The patents covering DL’s key products are due to expire in November 2031.

Wanda Wave and Patrick Photon ran the Research and Development division of DL. They were both officers. They had each signed nondisclosure agreements with DL. The employee handbook which they also signed stated that all disputes between the employer and the employee would be resolved by litigation in the state of Texas.

In 2019, Wanda and Patrick developed an optical imaging technology they dubbed Optical Coherence Tomography (OCT). They developed OCT at work using frequency technology owned by Dental Light. Like an ultrasound device, OCT generates a real-time two dimensional image of living tissue. The OCT has potential applications in the fields of dentistry and ophthalmology, as well as in other medical fields. Wanda and Patrick have sketched out ideas for many other related inventions but they have not yet done any work, such as developing prototypes.

Wanda and Patrick have grown increasingly dissatisfied at DL, due to its heavy bureaucracy. Patrick emails their discovery on March 4, 2019, to his wealthy friend Roarke Ruby who lives in Dallas. Roarke agreed to be an “angel” investor to help Wanda and Patrick develop their own company by investing $5M. Patrick and Wanda quit their jobs at Dental Light. On April 27, 2019, Patrick and Wanda file for a patent in the US, the EU and Japan for their OCT invention, listing themselves as the inventors.

Wanda and Patrick want to sever all ties with Texas so they move to the state of Washington. They now want to form a new entity in Washington to be called Laser Diagnostics. Laser Diagnostics will manufacture and sell the OCT product, as well as the additional inventions Patrick and Wanda are planning to develop. Patrick and Wanda want the ownership interests to be equal, although they realize Roarke may want a larger ownership interest compared to theirs, given his large investment in the company. No party wants personal liability. Roarke does not want to be involved in the day to day management of the company, but for his investment, he does want a seat on the board of directors.

Wanda and Patrick know they will need to approach several venture capital firms in the coming year to raise about $15 million to fund the FDA application and preclinical trials. They also want to have strong incentives to help them recruit high level employees.

Wanda and Patrick are also concerned that DL is not happy about this and may pursue them for legal claims in Texas. They would prefer litigation to take place in Washington. The only time they go to Texas now is for quarterly board meetings with Roarke.

They seek advice on the various legal issues presented by this situation. How would you advise them? How would you advise Roarke? What potential liability concerns do they have?

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